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ECONOMY, ENERGY AND FAIR WORK COMMITTEE

AGENDA

27th Meeting, 2018 (Session 5)

Tuesday 2 October 2018

The Committee will meet at 9.30 am in the David Livingstone Room (CR6). 1. Decision on taking business in private: The Committee will decide whether to

take items 5, 6, 7 and 8 in private. 2. Pre-Budget Scrutiny: The Committee will take evidence as part of its pre-

budget scrutiny from—

Derek Mackay, Cabinet Secretary for Finance, Economy and Fair Work,Jamie Hepburn, Minister for Business, Fair Work and Skills, Oonagh Gil,Deputy Director, Enterprise and Cities, and Gavin Gray, Deputy Director,Employability, Scottish Government.

3. Publicly Owned Energy Company: The Committee will take evidence from—

Catherine Waddams, University of East Anglia and UK Energy ResearchCentre; Kate Morrison, Energy Policy Manager, Citizens Advice Scotland; Neil Barnes, Deputy Director of Consumers and Markets, Ofgem; Ragne Low, Principal Knowledge Exchange Fellow, Centre for EnergyPolicy, University of Strathclyde.

4. European Union (Withdrawal) Act 2018: The Committee will consider aproposal by the Scottish Government to consent to the UK Governmentlegislating using the powers under the Act in relation to the following UKstatutory instrument proposal: Insolvency (Amendment etc.) (EU Exit)Regulations 2018, and will take evidence from—

Alex Reid, Head of Policy Development, and David Farr, Policy Manager:Corporate Insolvency, Accountant in Bankruptcy;

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Graham Fisher, Head of Branch, Legal Directorate - Constitutional & CivilLaw, Scottish Government.

5. European Union (Withdrawal) Act 2018: The Committee will consider itsresponse to the proposal by the Scottish Government to consent to the UKGovernment legislating using the powers under the Act in relation to thefollowing UK statutory instrument proposal: Insolvency (Amendment etc.) (EUExit) Regulations 2018.

6. Publicly Owned Energy Company: The Committee will consider evidence

heard at today's meeting. 7. Pre-Budget Scrutiny: The Committee will consider evidence heard at today's

meeting. 8. Work programme: The Committee will consider its work programme.

Alison WalkerClerk to the Economy, Energy and Fair Work Committee

Room T3.40 The Scottish Parliament EdinburghTel: 0131 348 5207

Email: Alison.Walker@parliament.scot

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The papers for this meeting are as follows— Agenda Item 2

PRIVATE PAPER EEFW/S5/18/27/1 (P)

Agenda Item 3

PRIVATE PAPER EEFW/S5/18/27/2 (P)

Written Submissions EEFW/S5/18/27/3

Agenda Item 4

PRIVATE PAPER EEFW/S5/18/27/4 (P)

Insolvency (Amendment etc.) (EU Exit) Regulations 2018 EEFW/S5/18/27/5

Agenda Item 8

PRIVATE PAPER EEFW/S5/18/27/6 (P)

June 2018 Page 1 of 39

Scoping Note on a Scottish

Publicly Owned Energy

Company

Ragne Low, Principal KE Fellow

Centre for Energy Policy, University of Strathclyde International Public Policy Institute

Executive Summary

This scoping note provides the Economy, Jobs and Fair Work Committee of the

Scottish Parliament with evidence to consider in its review of proposals for establishing

a Scottish Publicly Owned Energy Company (POEC). Conducted over a short period,

the scoping note is based upon a rapid review of the literature on public and not-for-

profit energy companies, the Scottish Government’s Strategic Outline Case document,

discussion with a number of interested stakeholders and the evidence and views

presented to the EJFW Committee during its inquiry on the draft Scottish Energy

Strategy in 2017.

In its consultation on the draft Scottish Energy Strategy (January-May 2017), the

Scottish Government sought views on the potential role and remit of a publicly owned

energy company to help the growth of local and community projects. In October 2017,

the First Minister made a commitment to establish a not-for-profit, publicly owned

energy company to supply energy to consumers at as close to cost price as possible.

A Strategic Outline Case was published by the Scottish Government in March 2018

setting out a series of operating models for delivering on the core objective of providing

competitively priced energy and helping to alleviate fuel poverty. The options set out

in Strategic Outline Case centre around the establishment of an energy supply

company (a retailer of gas and electricity to customers). This scoping note reviews the

evidence on establishing a Scottish publicly owned energy supply company as well as

wider evidence on what the purpose and model of a POEC could be.

A number of key points emerge. GB electricity (and to a lesser extent gas) supply is a

low margin market, a point recognised in the Strategic Outline Case and reinforced by

many sector stakeholders. The number of smaller suppliers in that market has grown

rapidly in the past five years, and an increasing number of these are offering fixed rate

or very low margin tariffs. The latest data suggest that the pre-tax margin on the

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average dual fuel consumer bill is just under 5%. Importantly, this is almost all

delivered by the gas component of bills. Average electricity pre-tax margins were

below zero for 2016. In the current market, successful suppliers are those that can

procure energy at lowest prices, have the most efficient billing and customer relations

systems, and are best at hedging risk. This is the market into which a Scottish

Government-owned supply company would be entering.

Taking a wider view of the purpose a POEC might ultimately fulfil, the review

conducted here suggests four overarching objectives a Scottish POEC could have:

Creating new energy infrastructure platforms

Accelerating wider energy system transformation

Increasing engagement and participation in the energy system

Reducing costs to consumers

This review concludes that a Scottish publicly owned energy company can deliver on

a number of these objectives. It also suggests that it is possible to integrate these

wider objectives into planning for the POEC, even if the focus for the POEC is initially

as an energy supply company. Further, it suggests that it is essential to consider these

wider objectives in the context of how the POEC will interact with existing energy policy

initiatives.

The EJFW Committee may wish to support further public debate on both the purpose

of the POEC and how it will work alongside existing policy, by considering the following

questions:

How might a Scottish energy supply company work best to support fuel poverty

reduction?

How can the POEC be best designed to maximise alignment with wider Scottish

energy policy objectives, and to remove all potential tensions with other policy

objectives?

Should a new Scottish POEC be more than solely a licensed energy supply company?

How might the POEC be designed to make space for objectives and functions beyond

the retail of gas and electricity? What benefits might this have?

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Table of Contents

Executive Summary ................................................................................................. 1

1. Introduction ....................................................................................................... 4

2. Context ............................................................................................................... 4

3. The GB Energy Markets .................................................................................... 9

4. A publicly owned energy company ............................................................... 12

5. Conclusions..................................................................................................... 25

6. References ....................................................................................................... 28

7. Appendices ...................................................................................................... 31

Acknowledgements

Several people kindly gave of their time to provide insights that have greatly enriched

this report. I gratefully acknowledge the following in particular:

Iain Wright, University of Glasgow; Chris Welby, Bristol Energy; Alice Waltham,

Energy Market and Regulatory Consultants; Nicholas Gubbins, Community Energy

Scotland; Gina Hanrahan, WWF; Alastair Martin, Flexitricity; Keith Bell, University of

Strathclyde; Gail Scholes, Robin Hood Energy; Hannah Smith, Scottish Renewables;

David Sigsworth, former Chair of the Scottish Fuel Poverty Strategic Working Group;

and, Dawn Muspratt, Our Power.

I would also like to thank Mags Tingey, University of Edinburgh and all of those who

attended the International Workshop on Publicly Owned Energy Companies she

organised on 11-12 May 2018. The workshop illuminated some key issues, which I

have tried to reflect in this report. Thanks also go in particular to Karen Turner and

Stuart Galloway, University of Strathclyde, and Alasdair Reid, SPICe.

The views expressed in this report do not represent those of the Scottish Parliament,

SPICe or the Economy, Jobs and Fair Work Committee. Any errors or omissions

remain the author’s own.

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1. Introduction

1.1 The Scottish Parliament Economy, Jobs and Fair Work Committee (EJFW)

commissioned the Centre for Energy Policy at the University of Strathclyde to produce

a scoping note setting out the potential options for a Scottish Publicly Owned Energy

Company (POEC), taking into account the content of the Scottish Government’s own

Strategic Outline Case (a report produced by Ernst & Young LLP (EY) for Scottish

Ministers, dated 29 March), and the EJFW Committee’s response to the draft Scottish

Energy Strategy (letter to Mr. Wheelhouse dated 30 June 2017).

1.2 The purpose of the scoping note is to inform an EJFW Committee call for

evidence on the POEC.

2. Context

Background

2.1 The commitment to explore setting up a Scottish publicly owned energy

company first appeared in the Scottish National Party’s 2016 Election Manifesto, which

contained a commitment to “explore the potential to create a government owned

energy company to help the growth of local and community energy projects. This will

include empowering communities to use the income from energy developments to

support other communities develop their energy potential” (SNP 2016, p.30). In its

consultation on the draft Scottish Energy Strategy (which ran from January – May

2017) the Scottish Government included a question on the potential role and remit of

“a Government Owned Energy Company to help the growth of local and community

projects”.

2.2 Following its inquiry on the draft Scottish Energy Strategy, the EJFW

Committee recommended in relation to the proposal for a POEC that “in the interests

of ensuring continuity of delivery for the strategy a long term framework be put in place;

one which could include the establishment of an independent body” (EJFW Committee

2017, para 70). The Committee took a broad view of the role a new public entity might

have, noting the “complexity of energy policy and the case for a national agency to

oversee it” and referred to the UK Committee on Climate Change, the Danish Energy

Agency, and the model of Transport Scotland for large infrastructure projects.

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2.3 In October 2017, the First Minister made a commitment to set up a publicly-

owned, not-for-profit energy company by the end of the current Parliament (March

2021), stating that “energy would be bought wholesale or generated here in Scotland

– renewable, of course – and sold to customers as close to cost price as possible. It

would give people – particularly those on low incomes – more choice and the option

of a supplier whose only job is to secure the lowest price for consumers” (First Minister

2017).

2.4 Based on Scottish Government statements, the key rationale for establishing

the company is the need to address fuel poverty, with the provision of greater choice

for (Scottish) consumers, contributing to economic development, and helping to deliver

broader Government energy ambitions – including the promotion of renewable

generation and maximising benefits for local communities – also stated as objectives1.

2.5 Based upon this rationale, the Scottish Government commissioned EY to

generate a Strategic Outline Case (SOC) for the POEC. The SOC sets out a series of

delivery options and operating models for delivering on the core objective to “provide

competitively priced energy and help alleviate fuel poverty”, acknowledging that

options and appraisal criteria may need to change if the fundamental objectives of the

POEC are refined or expanded (EY 2018, p.2).

2.6 The Scottish Government is currently considering the SOC and is committed to

public consultation as part of the process of further developing the case for the POEC

(Scottish Government 2018). Following HM Treasury Green Book guidance, the SOC

should be followed by an Outline Business Case that will explore in detail the shortlist

of options generated in the SOC. This scoping note provides the EJFW Committee

with a starting point to engage with the consultation processes around the further

development of the case for a Scottish POEC.

2.7 Given that the Scottish Government’s stated rationale for establishing a POEC

is to supply competitively priced energy to help address fuel poverty, this scoping note

provides a brief outline of the drivers of, and policy context around, fuel poverty in

Scotland.

1 See http://www.gov.scot/Topics/Business-Industry/Energy/POEC and http://www.gov.scot/Resource/0052/00529523.pdf

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Fuel poverty in Scotland

2.8 A household is defined as being in fuel poverty if it needs to spend more than

10% of household income to maintain an adequate heating regime2. Extreme fuel

poverty is defined as needing to spend more than 20%. (England adopted a new

definition in 2013: the ‘low income, high costs’ definition.)

2.9 The Scottish Government is about to introduce draft legislation for a new

definition for Scotland. In 2016, the Scottish Fuel Poverty Strategic Working Group

published its report ‘A Scotland Without Fuel Poverty is a Fairer Scotland’ (SFPSWG

2016). That report recommended a review of the definition of fuel poverty in Scotland,

which was taken up by an independent panel of experts that published its own review

of the evidence in November 2017. In that review, the panel states: “A major drawback

of the Boardman-based [10% of income needed to maintain a certain heating regime]

definition is that households which have quite high incomes can be classified as fuel

poor – in Scotland especially, this group represents more than half of all those in fuel

poverty, making this a very substantive problem.” (Scottish Fuel Poverty Definition

Review Panel 2017, p.12)

2.10 The Review Panel’s recommendation was for a definition as follows:

“Households in Scotland are in fuel poverty if:

they need to spend more than 10% of their after housing costs income on heating

and electricity in order to attain a healthy indoor environment that is commensurate

with their vulnerability status;

and if these housing and fuel costs were deducted, they would have less than 90%

of Scotland’s Minimum Income Standard as their residual income from which to pay

2 The complete definition is: if more than 10% of income (including any social welfare payments) is needed to maintain a heating regime of 21C in the living room and 18C in other rooms for a period of 9 h in every 24 (or 16 in 24 over the weekend); with 2 h being in the morning and 7 h in the evening. For elderly and infirm households, this is increased to 23C in the living room and 18C in other rooms, to be achieved for 16 h in every 24. The current method uses modelled dwelling energy performance to calculate the cost of maintaining the standard heating regime, alongside income data based on face-to-face interviews with residents (data are for the income of the highest earner in the household). Due to the small sample sizes, the results are reported as a three-year rolling average. (Mould and Baker 2017).

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for all the other core necessities commensurate with a decent standard of living.”

(Scottish Fuel Poverty Definition Review Panel 2017, p.15)

2.11 Recent research shows low income rural households in Scotland are spending

significantly more on energy than their urban equivalents, and rural households on

lower incomes may be spending more on heating than those on higher incomes

(Mould and Baker 2017). The Scottish Fuel Poverty Strategic Working Group (2016)

reported fuel poverty rates of 50% in rural areas compared to 32% in urban areas, due

to limited access to mains gas, larger detached dwellings and more exposure to wind

and weather, with fuel poverty rates highest in electric-heated properties at up to 60%,

and in energy inefficient properties at 73% in dwellings rated in the two poorest

performing bands.

2.12 As highlighted by the Competition and Markets Authority in its 2016

investigation into the energy markets, energy suppliers have tended to rely upon

customer inertia to bulk out their profits - with large numbers of their customers failing

to switch off their standard variable tariff (which is usually higher than alternative tariffs)

and/or failing to switch to an alternative supplier (CMA 2016). There is likely to be a

strong link between fuel poverty and non-switching although we did not find direct

evidence of this in the time available for this scoping review.

Figure 1 – Fuel poverty rates in Scotland 2003 – 2016 (WHD refers to the Warm Home Discount) Source: http://www.gov.scot/About/Performance/scotPerforms/partnerstories/HARO/ Indicators/High-quality-sustainable

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2.13 As shown in Figure 1, average fuel prices have fallen since 2014, the main

driver for a reduction in fuel poverty levels over the same period (with improved energy

efficiency accounting for about a third of the reduction in fuel poverty).

2.14 Fuel poverty is a complex and multidimensional issue. Energy prices are clearly

one important driver and a range of existing and emerging policies aim to offer

protection to those most vulnerable to fuel poverty.

Existing consumer protection measures

2.15 A new ‘safeguard tariff’ was introduced by Ofgem (the electricity and gas

markets regulator) in April 2017. The safeguard tariff applies to households that pay

for gas or electricity in advance using a prepayment meter (and since February 2018,

also to those households in receipt of the Warm Home Discount, which is a rebate on

electricity bills). The safeguard tariff limits how much a supplier can charge per kWH.

Ofgem sets the safeguard tariff level based upon an estimate of the true costs to

supply energy: wholesale costs, network costs (these vary geographically), policy

costs, operating costs, and costs specifically associated with prepayment meters. The

tariff is due to expire at the end of 2020 in parallel with expected completion of the

smart meter rollout (Ofgem 2017).

2.16 In February 2018, the UK Government introduced a Bill to Parliament for

a temporary tariff cap for customers on Standard Variable (SVT) and default tariffs –

the default tariff cap (UK Government 2018).

2.17 The proposed legislation:

creates a new duty for Ofgem to design and implement the default tariff cap

places a duty on Ofgem to implement the price cap as soon as practical.

2.18 The current safeguard tariff covers around 5 million customers across GB. In

December 2017, Ofgem consulted on extending existing protections to cover an

additional 2 million vulnerable customers in winter 2018/19 if the default tariff cap is

not introduced by then. Ofgem has proposed that eligibility for the extended safeguard

tariff will be assessed based upon factors such as: receipt of income-related

government benefits; receipt of disability benefits; and being on a default tariff. Whilst

fuel poverty and consumer vulnerability are not the same thing, an extended

vulnerable safeguard tariff (or default tariff cap) that is based upon evidence of low

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income and disengagement with the energy market will help to address some aspects

of fuel poverty (Ofgem 2017). Appendix I provides more detail on how the safeguard

tariff is applied in Scotland.

2.19 The Warm Home Discount itself is an obligation on energy suppliers to reduce

electricity bills for those that meet the eligibility criteria by £140 per annum, paid as a

one-off discount on electricity bills between September and March. The Scottish

Government will consult on the new powers under the Scotland Act 2016 for the future

design and implementation of the Energy Company Obligation and Warm Home

Discount in Scotland. Other (non supplier) support is provided through two benefits:

the Winter Fuel Payment scheme, essentially a pension top-up, and the Cold weather

Payment, a payment made to eligible households (mostly poorer pensioners) in

periods of very cold weather.

2.20 There are thus efforts underway to address the energy price element of the

causes of fuel poverty and these must be seen alongside wider policies to tackle

income inequalities, and to improve the energy performance of homes and the

efficiency of their appliances and heating systems. The links between plans for a

POEC and the wider provisions of forthcoming draft legislation on fuel poverty need to

be strong if the aim for the POEC is to help alleviate fuel poverty. And if in seeking to

address fuel poverty the POEC is to be mainly or solely an energy supply company,

its operational effectiveness will be very heavily determined by the context of the

current GB energy markets. This is the topic of the next section of this scoping note.

3. The GB Energy Markets

3.1 In Britain, electricity and gas generated by producers of energy are traded and

sold on to end consumers in liberalised wholesale and retail markets. The Scottish

Government’s stated purpose for the POEC is to “sell energy, whether bought

wholesale or generated in Scotland, to customers at as low a price as possible”

(Scottish Government 2018). This role as a retailer of energy to customers will

necessarily involve the POEC becoming an energy supply company that participates

in the GB energy markets for gas and electricity, which are described here.

Gas

3.2 The GB wholesale gas market is where natural gas is traded after it has arrived

in Britain. Sources include offshore production, liquefied natural gas (LNG) terminals,

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storage sites, pipelines from other countries (e.g. Norway) and interconnectors with

Belgium, the Netherlands and Ireland. There is a single price for gas on the wholesale

market (irrespective of where the gas comes from), called the National Balancing Point

(NBP) price. Shippers bring gas into Britain or transport it within Britain. Suppliers

provide gas to consumers. Availability and demand are matched on a daily basis by

National Grid Gas.

3.3 Energy suppliers purchase gas on the wholesale market and sell it on to their

customers in the retail market. The gas retail market functions in the same way as the

electricity retail market. The retail market is the market for the buying and selling of

gas or electricity between consumers and gas or electricity suppliers (retailers).

Consumers effectively engage a supply company to procure gas and electricity from

shippers and generators on their behalf. Current trading arrangements allow

consumers to choose their supplier and change supplier as often as they wish. Most

suppliers offer both electricity and gas to their customers.

Electricity

3.4 With the ‘functional unbundling’ of the electricity market under liberalisation,

generators, network operators and retail suppliers operate as separate entities,

contracting with one another to provide electricity to end-users. Suppliers and

generators pay network owners for the right to transport energy on their networks. In

the current market, successful suppliers are those that can procure energy at lowest

prices, have most efficient billing and customer relations systems, and are best at

hedging risk.

3.5 Suppliers, generators and Non Physical Traders (for example, banks) trade

electricity in the GB electricity wholesale market. Because electricity is currently not

stored in significant volumes, generation and demand must be kept in balance at all

times across the grid. Most electricity is traded bilaterally between generators and

suppliers in advance to cover the minimum amount needed to match demand - often

referred to as ‘baseload’. National Grid Electricity Transmission (NGET) is responsible

for real-time matching of generation and demand, using a trading system called the

Balancing Mechanism. All Parties in the wholesale market are required to lodge a

deposit, called ‘Credit Cover’, to reduce the risk that the rest of the industry will have

to pay for a defaulting Party’s liabilities.

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3.6 Figure 2 provides a simplified illustration of how the wholesale and retail

electricity markets function, together with generation and distribution of power.

Appendix II provides more detail on the functioning of the electricity market.

Figure 2 – Simplified GB electricity system – power flows (blue) and commercial arrangements

(orange)

Sources: Ofgem website https://www.ofgem.gov.uk/electricity/wholesale-market/gb-electricity-

wholesale-market, and Elexon’s ‘The Electricity Trading Arrangements: A Beginner’s Guide’

November 2017 https://www.elexon.co.uk/wp-content/uploads/2017/11/beginners_guide_v6.0.pdf

The relationship between consumer bills and system costs

3.7 Prices to consumers in the retail market comprise wholesale costs, network

costs, policy costs, operating costs, VAT and pre-tax profits. The latest data from

Ofgem, which are based on submissions from the six larger energy suppliers, suggest

that the pre-tax margin on the average dual fuel consumer bill is just under 5%.

Importantly, this is almost all delivered by the gas component of bills. Electricity pre-

tax margins were below zero in 2016 (i.e. electricity supply was loss making for the

2016 period in which data were submitted), whereas for gas were almost 11% (Ofgem

2018). The point that margins are tight is reinforced by evidence from a series of expert

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workshops held in response to the Welsh Assembly’s Environment and Sustainability

Committee recommendation for the establishment of a Welsh energy company

(Darnton 2017).

3.8 Network costs vary regionally, reflecting actual costs of maintaining networks

and of transporting energy across them from generators to consumers. This cost-

reflective charging is intended by Ofgem as a stimulus to overall system efficiency,

incentivising generation near centres of demand. Broadly speaking, the idea is that

the price a consumer pays should reflect how much it costs to transport energy to the

region they live in.

3.9 This is more an issue for electricity than for gas. In 2017, electricity consumers

in the North of Scotland paid 7 - 9% more than the GB average (Scottish Government

2018b). Overall, Ofgem analysis shows that regional variations in household bills are

largely (but not exclusively) driven by regional variations in national and local network

charges. This is more pronounced for electricity than for gas3. Regional differences in

energy bills that are not driven by network charges are likely to have a range of causes,

including variations in cost faced by suppliers in different regions. Market share and

customer behaviour (for example, willingness to switch supplier) may also contribute

to regional differences in supplier bills (Ofgem 2015).

3.10 GB electricity (and to a lesser extent gas) supply is a low margin market, a point

recognised in the Strategic Outline Case (EY 2018) and reinforced by many sector

stakeholders. The number of smaller suppliers has grown rapidly in the past five years,

and there are now 69 domestic suppliers (Ofgem 2018), an increasing number of

which are offering fixed rate or very low margin tariffs (Cornwall Insight 2018). This is

the market into which a Scottish Government-owned supply company would be

entering.

4. A publicly owned energy company

4.1 As the EJFW Committee heard in its inquiry on the draft Scottish Energy

Strategy, there is a range of strategic and delivery functions that a new public energy

3 For gas transmission, Ofgem analysis suggests that differences are so small that they are unlikely to be picked up in bills. Gas distribution cost differences are reflected in bills. Scottish consumers generally pay lower gas network costs than the average across GB regions (Ofgem 2015).

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body could fulfil, each with value in terms of meeting the objectives of the Scottish

Government’s long term energy strategy (EJFW Committee 2017). This section of the

scoping note takes a step back from the specific potential objective of supplying

competitively priced energy, to explore what wider potential objectives a POEC might

have.

Potential Purposes for a POEC

4.2 Based upon a review of the evidence gathered by the EJFW Committee, the

wider evidence presented in previous sections of this scoping note and engagement

with stakeholders across the sector, at least four potential purposes emerge for a new

public energy company:

Creating new infrastructure platforms

4.3 A public body would be well placed to support investment in new infrastructure

which others, including private companies, could then ‘plug in to’ to innovate and

provide new energy services to consumers4. Examples of the type of infrastructure

that could be supported are heat networks, energy storage infrastructure and electric

vehicle charging infrastructure. The Scottish and UK Governments are already

providing this type of support but a new body could act to better coordinate existing

schemes and provide additional capacity and specialist expertise, as well as to

increase levels of investment, accelerate the rate of roll-out and broaden the

geographical spread of these new infrastructures. A new body could promote

complementarity between energy system infrastructure investment and investment in

energy efficiency under the National Infrastructure Priority announced by the Scottish

Government (Scottish Government 2017).

Accelerating wider energy system transformation

4.4 A public body could provide more strategic and direct support for energy system

innovation. It could provide advice and guidance on programme and project

management for other public bodies and social enterprises, as well as coordinating

4 The term ‘public good’ has crept in to the public discourse on how government can support such ‘plug and play’ energy infrastructure. Strictly speaking, a genuine public good resource is something that is cost-free to access and for which the benefits of access are not exclusive. For energy infrastructure, there are costs associated with connecting-in any new user and a new user can only benefit from the resource by actively investing in accessing it.

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access to funding and/or finance for those projects. It could provide a data service for

the benefit of a range of energy system innovators, by collecting, holding and curating

data and leveraging value from it for a range of potential users. Working with Ofgem,

it could provide a platform for new business models to be trialled by others (e.g. local

supply models) including commercial actors.

Increasing engagement and participation in the energy system

4.5 A new public entity could take a stronger position in promoting and supporting

customers to switch supplier. As the SOC notes, the Scottish Government has already

part-funded Citrus Energy to provide an impartial switching service (EY 2018). This

could be developed and expanded. The public entity could work to improve

consumers’ understanding of their bills, and support the use of smart meter and other

data to empower consumers, increasing the potential for digital innovation to benefit

consumers across society.

4.6 The public body could also work to increase consumers’ engagement with

energy efficiency and low carbon energy technologies and energy services, enhancing

their potential role in demand side management. A further function could be to provide

information and advice (and perhaps also financial support) to boost local (co-)

ownership of energy assets and participation in decision making about energy

developments and technologies.

Reducing costs to consumers

4.7 Aligned with the rather more focused aim set out in the SOC, the fourth potential

purpose of a new publicly-owned body could be to recycle energy market profits back

to consumers, lowering bills and helping to tackle the fuel bills element of the causes

of fuel poverty. As well as involvement in the commercially competitive retail market,

such an objective might also entail supporting generation cost reductions in order to

lower the wholesale costs of power, or provision of alternative infrastructures and

technologies to deliver heat at lower cost to consumers than they are currently paying.

It might also involve supporting local supply models where local generation resources

are linked more directly to local consumers, potentially avoiding them paying the full

market costs of energy whilst being able to retain more value locally.

4.8 These four purposes are related and mutually reinforcing and if sufficient

resource were available, several might be addressed at once. They are all being

addressed to varying degrees through current Scottish Government policy, as well as

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at UK level. The creation of a POEC provides the opportunity to better coordinate

those existing policy initiatives and provide strategic oversight as well as various types

of support for on-the-ground delivery.

4.9 These various potential purposes are already reflected to different degrees in

existing not-for-profit and publicly owned energy initiatives. The next two sections

review some of these, as instructive for how a POEC might develop in Scotland.

UK Experience of Publicly-owned and Not-for-profit Energy Companies

4.10 In a review of local authority engagement in UK energy systems, Webb et al.

found a wide diversity of activities and business structures, with a mix of in-house,

commercial and not-for-profit entities including municipal energy service companies

(ESCos), private sector-led ESCos and community benefit societies. Motivations

include decarbonising local energy, improving energy security and saving on energy

costs. However energy provision and demand management are increasingly also

being seen as a source of revenue (Webb et al. 2017). Three examples are reviewed

here.

Robin Hood Energy

4.11 Robin Hood Energy is a licensed energy supply company wholly owned by

Nottingham City Council, established in 2015. Robin Hood Energy’s aim is to provide

affordable energy, and was launched with pre-payment meter customers particularly

in mind. Robin Hood succeeded in turning a profit this year, one of only very few small

suppliers to reach break-even point in such a short period. It now offers eight white

label5 products to other entities including several local authorities.

4.12 Robin Hood voluntarily participates in the Warm Home Discount scheme and

offers smart meters (in spite of being below the compliance threshold in terms of

customer numbers). The use of smart meter data in particular has allowed Robin Hood

to provide evidence of customers’ prompt payment and therefore enabled customers

to move onto cheaper tariffs faster than otherwise. Robin Hood also works to ensure

5 White label products are provided by a licensed supplier (in this case Robin Hood Energy) to another entity that sells that product on, separately branded in line with the buying entity’s objectives. Examples of white label contracts are Robin Hood’s white labels with Islington Council (Angelic Energy) and with Liverpool Council (LECCY), and SSE’s with Marks and Spencer (M&S Energy).

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that as few customers as possible are on their standard variable tariff and is in

discussion with Ofgem about ways of avoiding the standard variable tariff being the

default. Robin Hood’s Board is made up of City Councillors and staff have moved from

being local council employees to being employed by Robin Hood.

4.13 Robin Hood’s operating costs are around £2.8m per year6, with staff costs

representing about £1.9m of this. Set up costs were just under £2m, which is low

compared to comparable companies. Part of the reason for this is that Robin Hood

spent relatively little on marketing, and less than most comparable companies on

consultancy fees.

Bristol Energy

4.14 Bristol Energy began trading in 2015 as a licensed gas and electricity supply

company owned by Bristol City Council. The company operates independently of the

City Council. Staff are employed by Bristol Energy and the Board has a Bristol City

Council representative as well as other Non-Executive Directors. The process of taking

the company from initial proposal to fully licensed supplier took around five years.

Objectives include generating revenue for the Council, addressing fuel poverty and

providing a high standard of customer service. Bristol Energy is not yet profitable –

something that is far from unusual for the smaller companies in the supply market, and

in particular for socially motivated companies that emphasise compliance and

affordability for their customers. The company expects to be profitable (and begin

repaying Council loans) by 2021. It has around 60,000 customers across GB, including

13,000 in Bristol (7% of city households), to whom it offers the cheapest tariff in the

city.

4.15 Bristol Energy runs the Fuel Good Fund, which supports Bristol charities

working to tackle fuel poverty as part of a wider Council-led initiative. The Fund is

financed from donations made each time a new customer signs up to Bristol Energy

(£15 per fuel, £30 for a dual fuel customer). Bristol Energy trialled an at-cost social

tariff, which was offered directly to fuel poor households via referrals from charities,

6 Borrowing, which includes commodity costs (to cover the purchase of gas and electricity), is around £5m per year.

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but sign-up rates fell very far below projections – demonstrating the challenge of

engaging with some of the most vulnerable and disengaged consumers.

Our Power

4.16 Our Power is not strictly speaking a publicly owned company, but it has many

of the attributes of a publicly owned company. Established in 2015, Our Power is a

Community Benefit Society with subsidiaries operating as a licensed energy supply

company (Our Power Energy Supply Ltd) and engaging in renewable generation and

district heating. It is owned by its 66 members and is asset-locked and non-profit

distributing. Membership is open to Social Landlords, Local Authorities and

Community Controlled Organisations who collectively own over 200,000 homes. Our

Power offers a void management service to its members which includes a switch to

Our Power during the void period (though residents can then choose whether to stay

with Our Power or switch).

4.17 Our Power now has over 27,000 customers, with tariffs available to the wider

market to help to gain scale, with the objective of becoming profitable by 2021. Tariffs

do not vary by payment method and Our Power has one of the lowest prepayment

tariffs in GB. Our Power introduced the first alternative tariff for customers with

restricted meters (i.e. households on Total Heat Total Control or ComfortPlus tariffs)

offering significant savings for the majority of these customers. It also has a number

of partnerships with local authorities and community-controlled organisations

(including Hebrides Energy to offer a range of local tariffs in the Hebrides) and is

engaged in renewables development and exploring ways to use renewable generation

to benefit fuel poor customers. 90% of its electricity is from renewable sources.

4.18 Our Power has benefited from Scottish Government support, including an initial

grant for feasibility work and repayable loans of £2.75m and £3.25m million from the

Scottish Government and loans of £1m and £.6m from Social Investment Scotland.

Investment support has also come from the Joseph Rowntree and Esmee Fairbairn

Foundations, and Tudor, Barrow Cadbury and Robertson Trusts. Further working

capital was raised in 2017 via a social purpose bond which raised £4.5m.

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Overseas Experience of Publicly-owned Entities

German municipal energy companies

4.19 German municipal energy companies are often cited as examples of successful

publicly owned companies. In fact the motivations and structures of these companies

vary widely and some are more commercially successful than others. In Germany

there is a legacy of small, local grids and legal structures available for municipal

services. Unlike in Britain, although privatised, the sector is subject to concessions

which are issued by local municipalities7 and re-municipalisation has been relatively

more straightforward to achieve where concessions were up for renewal. Even then,

there have been cases of the incumbent operator taking legal action against the

municipality that is trying to take on the energy assets. Depending on local

circumstances, the result is a mix across municipalities of private-public partnerships

and wholly public entities. Public backing (e.g. via a referendum in Hamburg) has been

key.

The Swedish Energy Agency

4.20 The Swedish Energy Agency works largely as an energy policy delivery agency,

and innovation and R&D funder covering renewables, smart grids and low carbon

vehicles and transport fuels. It was formed in 1998 to support uptake of new energy

technologies and its research funding is targeted in particular at industry and

supporting commercialisation. The agency produces evaluations, national statistics

and consultation responses. It manages instruments such as the Electricity Certificate

System and the EU Emission Trading System. The Swedish District Heating Board is

an independent unit within the agency and acts as a mediator between district heating

companies and their customers regarding district heating contracts and network

access and management, to support compliance with Sweden’s District Heating Act.

The Danish Energy Agency

4.21 The Danish Energy Agency is similar in many respects to the Swedish Energy

Agency, but acts more as a regulator, for example administering subsidies and

supplier obligations, designing and enforcing energy labelling schemes for buildings

7 The networks themselves are publicly owned by regional/local government and municipalities tender

concessions competitively to operators for fixed periods (much like the rail sector in Britain).

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and products, managing the EU Emissions Trading System in Denmark, and

regulating the biogas industry. It has a regulatory role in relation to energy generation,

supply and consumption, including in buildings. It was established in 1976 and has

360 staff. It runs a range of low carbon partnership programmes overseas, and is

responsible for managing energy systems models and providing analysis. The

Swedish and Danish agencies are examples of the value of an independent body that

can take a longer-term, strategic view (beyond political cycles) of energy policy

delivery.

General Issues, Opportunities and Challenges

Targeting fuel poverty

4.22 As noted above, one fifth of Scottish homes are off the gas grid and off-grid

areas tend to have higher rates of fuel poverty than on-grid areas. The Scottish Fuel

Poverty Strategic Working Group’s 2016 report recommended that the Scottish

Government identify specific measures to support customers in rural and off-gas grid

areas who suffer from higher energy prices on average than the rest of Scotland. The

role of a POEC in relation to tackling off-gas grid fuel poverty merits further

consideration, in particular in relation to consumers with electric heating, given the low

margins in the electricity supply market and the likelihood of a publicly owned supply

company being able to offer significant tariff reductions for electricity compared to

other suppliers. For these consumers, providing support for switching may be as

significant as offering a new tariff in the market8.

4.23 The Scottish Fuel Poverty Strategic Working Group’s report also recommended

that a new fuel poverty strategy should include direct support for the fuel poor on

managing their energy use, switching to better tariffs, ensuring correct billing and debt

relief. If its purpose is considered in broader terms than simply as a not-for-profit

retailer of gas and electricity, the publicly owned energy company presents an

8 The 400,000 customers with restricted meters in Scotland – such as those on Economy 10 tariffs – have traditionally been subject to additional constraints on their ability to switch. At present, few mid-tier or small suppliers are able to supply these customers. In practice, some are more expensive to supply than others, and as a group, they are difficult for suppliers to price. The CMA has imposed new conditions on suppliers, requiring them to make all their single-rate electricity tariffs available to all domestic electricity customers on restricted meters (CMA 2016b).

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opportunity to provide exactly this sort of support. Such a role for the POEC could be

articulated under the provisions of forthcoming fuel poverty legislation.

Interaction with local initiatives

4.24 The business or operational objectives of a new national energy body could

support local initiatives explicitly or equally might be in tension with them if it set up in

a way that effectively competes for resources and customers. As local authorities

across Scotland become increasingly active in establishing ESCos, investing in energy

projects and delivering on energy efficiency objectives, there is likely to be an

increasing diversity of approaches taken across Scotland. A national entity has the

potential to provide a central resource to support these various initiatives, but there is

a risk it could stifle local innovation if it were too centralising and directive. If the POEC

were solely a supply company, it might support local initiatives through white label

arrangements – alternatively it could, potentially at least, end up in competition with

other emerging not-for-profit supply company initiatives.

4.25 One potential impact of the establishment of a POEC could be increased local

employment in the area in which the POEC is headquartered, and through local supply

chains if the POEC had a role in investing in energy generation or infrastructure (for

example heat networks or through supplier obligations on energy efficiency).

Increased local employment would be expected in turn to have a positive effect on

incomes and thus potentially on local fuel poverty levels.

Interaction with other policy initiatives

4.26 As highlighted above (paragraph 4.23) there are clear linkages with the

forthcoming Fuel Poverty Strategy.

4.27 The objectives of the Energy Efficient Scotland programme9 also clearly align

with those of a POEC: as energy efficiency improves under the Energy Efficient

Scotland programme, this will reinforce the positive effects of efforts to make energy

more affordable spearheaded by the POEC (Scottish Government 2018c). However,

thought will need to be given to the POEC’s role (if any) in delivering the Energy

9 The Energy Efficient Scotland programme is the suite of policies and projects aimed at delivering the

National Infrastructure Priority on energy efficiency. The ambition is for a step change in the energy

efficiency of Scotland’s domestic and non-domestic buildings over the next 20 years.

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Company Obligation, given that the ECO is also a major source of funding under

Energy Efficient Scotland.

4.28 Further policy developments in relation to the objectives set out in the Energy

Strategy that are expected soon are expected to include, at least, a strategic statement

on local energy as well as statements on electricity and gas policy and market

development. Again, these Scottish Government policy statements could have a direct

bearing how the POEC develops and the effectiveness of its operational design.

Period of rapid change in the energy system and market regulation

4.29 There are many new small suppliers in the market and some are experimenting

with extremely low margin tariffs and fixed bills. The effect on the supply market of this

is yet to play out. Over the past two years, Ofgem has been moving to introduce a

series of regulatory changes that aim to strengthen competition and increase

consumer protection in the supply market. This includes reforming the ‘supplier hub’

model (in which suppliers are the primary interface between consumers and the

energy system, acting as the ‘hub’ of the market), and moving to half-hourly settlement

(use of half-hourly smart consumption data to settle consumers’ bills), as well as

considering how time-of-use tariffs may be rolled out (where the prices consumers pay

per unit of energy change across the day, and are cheaper when the system needs

more demand to balance and more expensive when demand is high and the system

would benefit from demand being ‘dialled down’). There are also very recent moves

by Ofgem to review supplier licensing in relation to the safeguards for customers of

failed suppliers and the conditions for market entry for new suppliers.

4.30 Further change is occurring in the market in relation to finding innovative ways

to link local generation and demand. The Scottish Energy Strategy sets out a vision

for local energy, the full delivery of which implies some change in the relationships

between, and responsibilities of, generators and suppliers to enable greater matching

of local generation (and other energy assets such as storage) with local demand.

Ofgem’s Innovation Link10 was set up to test new business models in the market,

including peer-to-peer electricity trading.

10 See https://www.ofgem.gov.uk/about-us/how-we-engage/innovation-link

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4.31 The importance of data in the energy system is increasing. A new POEC will

face a rapidly growing set of opportunities and challenges around the collection and

use of data. There is an opportunity from the smart meter rollout to better target

support to vulnerable and fuel poor consumers, and to supplement this with

increasingly sophisticated data collection, monitoring and analysis techniques. New

intermediaries are emerging in the market, offering novel data services. The protection

and proper use of data will become even more salient.

4.32 There is a wider move in the electricity system towards a Distribution System

Operator (DSO) model, where the distribution network operators would have a greater

role in managing the system at the distribution network level. There are different

potential ways in which this will work and the benefits and costs will fall differently

depending on which model (or models) are eventually adopted. This shifting landscape

in the electricity system may have implications for a Scottish public energy company.

Similarly, the new energy service models that are emerging, including around

providing low carbon heat, may prove to be significant market disruptors. Again, the

implications for customers (and different groups of customers) and the wider market

are still uncertain.

4.33 Taken together, these changes – and the uncertainties they bring – suggest a

need for the POEC to have a very clearly defined purpose, against which its business

model can be designed in a way that enables adaptation to changing circumstances

whilst maintaining delivery of its core aims.

Governance and democratic accountability

4.34 Governance and accountability are concerns for any new public body. There

are a number of approaches that might be taken, some of which are described in the

SOC (EY 2018). Municipal energy companies on the continent may provide good

examples of how local democratic structures can be integrated with energy company

governance to ensure accountability. Statoil (now Equinor) is a further instructive

example – for its first decade of operation, the company was obliged to take strategic

decisions to Parliament for democratic scrutiny, which was critical to a more social and

environmental remit for Statoil (Cumbers et al. 2013). The Scottish Fuel Poverty

Strategic Working Group recommended that the Scottish Government should involve

people who are experiencing fuel poverty in the development of the new fuel poverty

strategy and its delivery and evaluation (SFPSWG 2016). The same principle should

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apply to the publicly owned energy company, where those whom the company is being

established to benefit should be consulted on its mission and operation. A public

company that has a direct role in supplying customers with services and charging for

those will need particularly robust governance arrangements, transparently managed.

Particular issues and challenges related to setting up an Energy Supply

Company

Customer acquisition

4.35 Prudent targets are sensible given the relatively low switching rates in the

market. Robin Hood Energy set a target of 30,000 customers per year initially, for

example. As the Scottish Fuel Poverty Strategic Working Group put it: “Advice on

switching will require a concerted and sustained effort to achieve better engagement

with the fuel poor to overcome the propensity not to switch – especially in rural

Scotland” (SFPSWG 2016, p.28). Given state aid rules, which would suggest that the

Scottish Government would have to be cautious in its promotion of a government-

owned supply company, the company itself might have to invest in a concerted

customer acquisition campaign. As noted in the SOC, the social enterprise Citrus-

Energy offers an existing impartial switching service, and is working in partnership with

the Scottish Government programme Home Energy Scotland (EY 2018).

Customer retention

4.36 Customer retention is perhaps even more important than initial acquisition,

because by definition these acquired customers are customers who have switched at

least once before to a new supplier (and are therefore more ‘mobile’ and less easy to

retain than customers who have never switched).

Consultancy costs

4.37 These are inevitable and may be substantial irrespective of whether a White

Label or full Licence model is chosen. Due diligence is therefore vital, but takes time

(which in turn may be a challenge given the timescales implied by the commitment to

have the POEC operational by 2021).

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Hedging strategy

4.38 Complex and essential, hedging refers to the ability to buy power over different

timescales at set prices to manage risk of exposure to changes in price. It is critical to

profitability, and a key source of risk.

Credit cover requirement

4.39 Some early non-Big 6 suppliers were caught out by high credit cover costs

when wholesale prices suddenly escalated in the late 2000s. For any supply company,

estimation and provision of credit cover must be well managed to reduce risk.

Customer relationship management

4.40 This is key to the ability of a supplier to provide good customer service, which

in turn directly affects reputation. Reputation is an important factor in customer

acquisition and retention. Customer service is arguably particularly important for a

publicly owned company where expectations may be higher.

Settlement and billing

4.41 It is essential to get the right IT in place to deal with customer billing and the off

the shelf options are not necessarily the most cost effective in the medium-term,

implying complex procurement processes (specifying precisely the system

requirements and then performing due diligence on suppliers).

Compliance costs

4.42 Various supplier obligations become relevant as a supply company grows. For

example, above 250,000 meter supply points (which with dual fuel customers could

mean 125,000 customers), the Renewables Obligation will apply to a supplier. The

Energy Company Obligation, smart meter roll out and other schemes will also apply

over certain thresholds. These schemes can add significant costs to a supply business

and tipping just over thresholds is a risk that needs managing. Thresholds are

changing for some of these schemes, implying a degree of uncertainty in the medium

term about which compliance costs will be applicable (see for example BEIS 2018).

Transparency

4.43 A publicly owned energy supply company will inevitably be subject to greater

scrutiny than private supply companies, including through Freedom of Information

requests and media attention. This has been the experience of local authority owned

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supply companies in the UK to date. As well as reacting to externally-driven

requirements for transparency, a publicly owned company would be very likely to wish

proactively to make information available to the public about the operation and

performance of the company. Managing the flow of information for transparency

purposes will cost more for a publicly owned supply company than for its private

competitors.

State Aid restrictions and potential conflicts of interest

4.44 Because the supply market is a fully competitive one, a Scottish Government-

owned supply company would need to be sufficiently independent from the Scottish

Government to avoid any potential breach of rules aimed at preventing anti-

competitive behaviour. This means, for example, that public resources could not be

used to promote a government-owned supply company in the market, and the

company would have to compete on equal terms with others if it were tendering for

public sector contracts. (The recent example of Bristol Council procuring energy from

a supplier other than its own Bristol Energy is instructive.) Potential conflicts of interest

would need attention too – for example with respect to the powers over the

implementation of supplier obligations (the Energy Company Obligation and Warm

Home Discount) that are now devolved to Scotland.

5. Conclusions

5.1 This scoping review highlights many of the same issues raised by stakeholders

in relation to a POEC at the EJFW’s inquiry on the draft Energy Strategy. Those

stakeholders wanted to see a POEC that could take a strategic oversight role in the

energy sector, driving innovation and supporting investment in and deployment of low

carbon energy technologies, coordinating energy efficiency activities to achieve a step

change improvement in Scotland’s housing stock, and supporting local energy

systems and helping to drive down the cost of energy11.

5.2 The focus on consumer bills and fuel poverty in the SOC takes the POEC in a

particular direction, away from having this more strategic role, and narrows down its

purpose to that of an energy supplier. As the SOC shows, there is scope for a Scottish

11 These stakeholder responses are set out in detail in Appendix IV.

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publicly owned energy supply company to save customers money by returning the

profit that private companies make back to consumers. Profit margins in the supply

industry are low, and there is already a wide range of tariffs and small suppliers

available to consumers. These two factors mean that customer switching to the POEC

is likely to make as large a difference to consumers’ bills as the fact that POEC may

be able to offer new competitive tariffs. This puts emphasis on the POEC’s potential

for customer acquisition, and for driving up switching rates. The existing not-for-profit

supply companies reviewed here exhibit a range of rates of success in the market,

although they do demonstrate that a socially-minded supply company can make a

difference to fuel poor and vulnerable consumers.

5.3 The other models of public energy company reviewed here, for example state

energy agencies and municipal energy companies, provide additional examples of

what a POEC could achieve in terms of supporting strategic action in the energy sector

and public development and ownership of energy assets. However, this review has

focused more on the potential purpose of a POEC in the Scottish context, setting out

four overarching objectives a POEC might have:

Creating new infrastructure platforms

Accelerating wider energy system transformation

Increasing engagement and participation in the energy system

Reducing costs to consumers

5.4 The review of evidence and stakeholder views presented here suggests that a

Scottish publicly owned energy company can deliver on a number of these objectives.

It would also suggest that it is possible to integrate these objectives into planning for

the POEC, and that it is essential to consider these in the context of how the POEC

will interact with existing energy policy initiatives.

5.5 The EJFW Committee may wish to support further public debate on both the

purpose of the POEC and how it will work alongside existing policy, through its work

on the POEC. Based on this scoping review, the EJFW Committee may wish to

consider the following questions in any call for evidence or further inquiry it may make

in relation to the POEC:

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How might a Scottish energy supply company work best to support fuel poverty

reduction?

How can the POEC be best designed to maximise alignment with wider Scottish

energy policy objectives, and to remove all potential tensions with other policy

objectives, (for example around creating integrated local energy systems that link

local supply and demand and retain value locally, or around decarbonising heat

through a differentiated and locally appropriate suite of policy interventions)?

Should a new Scottish POEC be more than solely a licensed energy supply

company? How might the POEC be designed to make space for objectives and

functions beyond the retail of gas and electricity? What benefits might this have?

The POEC could be purposefully designed to accommodate objectives and

functions beyond energy retailing. This could be achieved for example by

the supply company becoming a subsidiary of a wider group of companies

with complementary roles. Or the mission and activities of the supply

company could be purposively aligned with those of a strategic oversight

body established in parallel with the supply company (and which might have

a governance relationship with the supply company e.g. through

representation on the supply company’s Board). Or the supply company

could be designed with flexibility and growth built in at the outset, as

suggested in the Strategic Outline Case.

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6. References

BEIS 2018, ‘Press release - Households with smaller energy suppliers to benefit

from £140 Warm Home Discount on their energy bills’. 15 June 2018. Available at:

https://www.gov.uk/government/news/households-with-smaller-energy-suppliers-to-

benefit-from-140-warm-home-discount-on-their-energy-bills

CMA 2015, ‘Energy Market Investigation: Gas wholesale Market’. Available at:

https://assets.publishing.service.gov.uk/media/54ff238040f0b6140700000c/Gas_who

lesale_market.pdf

CMA 2016, ‘Energy Market Investigation’ Available at;

https://assets.publishing.service.gov.uk/media/5773de34e5274a0da3000113/final-

report-energy-market-investigation.pdf

CMA 2016b, ‘Energy Market Investigation: Explanatory Note - Energy Market

Investigation (Restricted Meters) Order 2016’. Available at:

https://assets.publishing.service.gov.uk/media/58513f75ed915d0aeb00009e/energy-

market-restricted-meters-order-explanatory-note.pdf

Cornwall Insight 2018, ‘Tariff limbo: how low can domestic supplier margins go?’

Available from Cornwall-Insight.com

Cumbers, A., Danson, M., Whittam, G., Morgan, G., and Callaghan, G. 2013

‘Repossessing the Future: A Common Weal Strategy for Community and Democratic

Ownership of Scotland’s Energy Resources’, Jimmy Reid Foundation. Available at:

http://www.allofusfirst.org/commonweal/assets/File/Repossessing-1.pdf

Darnton, A. 2017, ‘An Energy Company for Wales? Stakeholder Engagement Events

– Summary Report’ Welsh Government. Available at:

https://gov.wales/topics/environmentcountryside/energy/publications/an-energy-

company-for-wales/?lang=en

EJFW 2017, ‘Draft Energy Strategy – EJFW Committee Response’, Letter to Mr

Wheelhouse from the Convener of the Economy, Jobs and Fair work Committee, 30

June 2017. Available at:

http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/20170630Convener

_to_Minister-EnergyStrategy-Web.pdf

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Elexon 2017, ‘The Electricity Trading Arrangements: A Beginner’s Guide’

https://www.elexon.co.uk/wp-content/uploads/2017/11/beginners_guide_v6.0.pdf

Environment Journal 2016, Interview with Gail Scholes, CEO of Robin Hood Energy

https://environmentjournal.online/articles/robin-hood-energy-one-year/ 13 October

2016

EY 2018, ‘Publicly Owned Energy Company: Strategic Outline Case (SOC)’ 29

March 2018. Available at: http://www.gov.scot/Resource/0053/00533962.pdf

First Minister Right Honourable Nicola Sturgeon MSP, Speech to the October 2017

SNP Conference, Available at:

https://www.snp.org/nicola_sturgeons_speech_to_the_snp_conference_2017

Mould R. and Baker K. 2017, Uncovering hidden geographies and socio-economic

influences on fuel poverty using household fuel spend data: A meso-scale study in

Scotland, Indoor and Built Environment, Vol. 26(7) 914–936

Ofgem 2015, ‘Regional Differences in Network Charges’, Available at:

https://www.ofgem.gov.uk/sites/default/files/docs/2015/10/reg_charges_final_master

_version_23_october_2015.pdf

Ofgem 2017, ‘Providing financial protection to more vulnerable consumers’ Available

at:

https://www.ofgem.gov.uk/system/files/docs/2017/12/providing_financial_protection_t

o_more_vulnerable_consumers_0.pdf

Ofgem 2018, Infographic; Bills, Prices and Profits webpage, Available at:

https://www.ofgem.gov.uk/publications-and-updates/infographic-bills-prices-and-

profits

Scottish Fuel Poverty Definition Review Panel 2017, ‘A new definition of fuel poverty

in Scotland: A review of recent evidence’, Available at:

http://www.gov.scot/Resource/0052/00527017.pdf

Scottish Government 2017, ‘National Infrastructure Priority for Energy Efficiency -

Scotland's Energy Efficiency Programme’. Available at:

http://www.gov.scot/Publications/2017/01/2195

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Scottish Government 2018, Publicly Owned Energy Company webpage, Accessed 6

June 2018. Available at: http://www.gov.scot/Topics/Business-

Industry/Energy/POEC

Scottish Government 2018b, ‘Energy in Scotland 2018: Key Facts’, Available at:

http://www.gov.scot/Resource/0053/00531699.pdf

Scottish Government 2018c, Energy Efficient Scotland: Route Map webpage,

Accessed 11 June 2018. Available at:

http://www.gov.scot/Publications/2018/05/1462

SFPSWG 2016, ‘A Scotland without Fuel Poverty is a Fairer Scotland: Four Steps to

Achieving Sustainable, Affordable and Attainable warmth and Energy Use for All’,

Available at: http://www.gov.scot/Publications/2016/10/2273

SNP 2016, Election Manifesto, Accessed 28 May 2018. Available at:

https://d3n8a8pro7vhmx.cloudfront.net/thesnp/pages/5540/attachments/original/1461

753756/SNP_Manifesto2016-accesible.pdf?1461753756

UK Government 2018, https://www.gov.uk/government/collections/domestic-gas-

and-electricity-tariff-cap-bill

Webb, J., Tingey, M. and Hawkey, D. 2017 ‘What We Know about Local Authority

Engagement in UK Energy Systems: Ambitions, Activities, Business Structures &

Ways Forward’, UKERC and ETI. Available at

http://www.ukerc.ac.uk/publications/what-we-know-about-local-authority-

engagement-in-uk-energy-systems.html

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7. Appendices

Appendix I: The Safeguard Tariff

Data on the current levels for Ofgem’s vulnerable safeguard tariff are provided below.

For the North of Scotland region, based on a simple prepayment meter:

Gas – standing charges are 26.96 pence/day; unit price is 3.31 pence/kWh

Electricity – standing charges are 28.97 pence/day; unit price is 14.61 pence/kWh

For the South of Scotland region, based on a simple prepayment meter:

Gas – standing charges are 26.96 pence/day; unit price is 3.31 pence/kWh

Electricity – standing charges are 28.97 pence/day; unit price is 13.65 pence/kWh

For comparison, the average (arithmetic mean) for the safeguard tariff across all GB

regions is 3.36 pence/kWh for gas and 14.19 pence/kWh for electricity.

Source: Ofgem’s Prepayment Price Cap FAQ document, April 2018, available at:

https://www.ofgem.gov.uk/publications-and-updates/safeguard-tariff-prepayment-

reporting-template-and-faq

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Appendix II: The Electricity Market in More Detail

Suppliers, generators and Non Physical Traders (for example, banks) trade electricity

in the GB electricity wholesale market – they are called Parties in the Balancing and

Settlement Code that governs the market. Elexon is the company that administers the

Code on behalf of Parties, providing and procuring services to implement the Code

and ensure the wholesale market runs efficiently and accurately.

Electricity is currently not stored in significant volumes and generation and demand

must be kept in balance at all times across the grid. Electricity is traded in half-hour

blocks called Settlement Periods, for which suppliers assess demand (from their

customers) and strike contracts with generators or on power exchanges12. Contracts

for electricity can be struck well ahead of delivery, sometimes several years, right

down to the time of delivery (the Submission Deadline).

Electricity is usually traded far in advance to cover the minimum amount needed to

match demand - often referred to as ‘baseload’. This tends to be contracted for

bilaterally between generators and suppliers for example directly through Power

Purchase Agreements. Power exchanges tend to be used to adjust baseload to meet

the expected demand on a specific day, usually closer to the delivery time and based

on things like the weather forecast for that day.

Within each Settlement Period, National Grid Electricity Transmission (NGET)

manages the real-time matching of generation and demand. One of the main tools it

uses to do this is the Balancing Mechanism, where generators and suppliers that are

flexible enough can make ‘Offers’ to increase generation or reduce demand for a given

price, and ‘Bids’ to reduce generation or increase demand for a given price, at very

short notice. NGET uses the Balancing Mechanism to match supply and demand in

each half hour, in real-time, by accepting Bids or Offers depending on whether the

system needs more or less generation (or demand) to stay in balance.

After each Settlement Period, imbalance charges are payable by Parties (suppliers,

generators and Non Physical Traders) that have failed to use, generate or sell exactly

the amount of electricity they contracted for, taking into account any Bids and Offers

12 A note on power exchanges: buyers and sellers of electricity buy and sell anonymously – i.e. buyers do not know which seller they are buying from and vice versa.

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accepted. The differences between what they contracted for and what actually

occurred are called imbalances.

Where any Party does not meet its imbalance charges (i.e. defaults on payment), all

the Parties pick up the cost proportionally. However, all Parties have to lodge a

deposit, called ‘Credit Cover’, to reduce the risk that the rest of the industry will be

required to pay for a defaulting Party’s settlement liabilities. Credit Cover levels are

set by Elexon based on a calculation of imbalance exposure.

The following diagrams show in more detail how the physical infrastructure of the

electricity system (in blue) interacts with the commercial arrangements of the electricity

market (in orange), as well as how electricity flows are physically controlled (green).

Figure 3 shows this in simple terms:

Figure 3 – Simple model of the energy system and market

Figure 4 below shows the current – or incumbent – model of the GB electricity system

in more detail than provided in the body of this report.

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Figure 4 – Detail of the incumbent electricity system model

Source: Ongoing research by Damien Frame, Electronic and Electrical Engineering,

University of Strathclyde

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Appendix III: Relevant Scottish Energy Facts and Figures

Total energy consumption in Scotland breaks down roughly to 50% for heat, and 25%

each for electricity and transport. Gas consumption in Scotland’s domestic properties

has gone down 30% since 2006. 20% of Scottish households are off the gas grid. The

energy efficiency of Scotland’s housing stock has been increasing, with at least 100

mm of loft insulation is installed in an estimated 94% of lofts (up 12% on 2010 levels)

and a high standard of insulation (300 mm or more) now in 30% of homes (up from

only 5% in 2010). Levels of insulation (both loft and wall) are higher in the social sector

than in the private sector. 53% of walls (all types) are insulated in the private sector

compared to 71% in the social sector. 62% of lofts are insulated to 200 mm or more in

the private sector compared to 78% in the social sector.

Overall, domestic energy consumption (heat and electricity) has fallen 20% since the

2005-2007 baseline period. The change in average direct debit bills in Scotland since

2004 has followed wider GB trends, increasing 84% for gas and 52% for electricity.

Sources:

Energy in Scotland 2018 Key Facts

http://www.gov.scot/Resource/0053/00531699.pdf

and

Scottish House Condition Survey Key Findings 2016

http://www.gov.scot/Publications/2017/12/5401/348227

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Appendix IV: POEC Evidence from the EJFW Committee’s Inquiry on the

draft Scottish Energy Strategy

In responding to the EJFW’s inquiry, WWF stated: “Internationally, government

agencies and energy companies have had an important role in overcoming market

failure, capacity building, and driving forward the transition to clean energy and energy

efficiency. There is a role for a similar body with a broad suite of responsibilities in

Scotland.”

Ofgem’s response to the Scottish Government’s consultation on the draft Energy

Strategy included the statement: “The vast amounts of data that the smart transition

will generate should also permit greater diversity in tariff offerings. However, as the

retail environment becomes more diverse and complex, providing an appropriate level

of service for those not able to navigate the market could become more challenging.

Whilst many of the changes we are witnessing with regards to new business models

and products are potentially positive, it is important that the less engaged and those

in vulnerable situations are also able to benefit.” And: “We are reforming the rulebook

to future proof our regulation and put responsibility on suppliers to understand what is

right and fair for their customers. This will ensure that customers can benefit from

technological change and innovation in the market, while protecting them from new

risks. We will ensure that energy suppliers who fail to put the needs of consumers at

the heart of their business will continue to face tough action. We welcome the Scottish

Government’s commitment to engage with the UK Government, Ofgem and consumer

groups to secure effective regulation of the retail energy market.”

And specifically:

“A Government-owned energy company: There are already various public sector

models emerging in the energy supply market. For example, Nottingham City Council

have set up Robin Hood Energy and Bristol City Council created Bristol Energy. In

Scotland, we see “Our Power” which is rooted in the social housing and local

government sectors. As such, public sector ownership per se is consistent with and

enabled by current regulation. If the Scottish Government wanted to act as a supplier,

a Government-owned energy company would, of course, have to comply with

regulatory arrangements like any other. State aid matters would also be a

consideration for the Scottish Government as they would be in any other publicly

supported intervention that could affect competitive markets. Strategic support for

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innovation can be crucial in overcoming the market failures in developing new

technologies and approaches. We have set up the Innovation Link to provide a space

where innovators can come to us and seek advice on the regulatory implications of

their ideas and would be very happy to talk to the Scottish Government about the

models they are looking at and expertise we can provide.”

COSLA’s response noted “Elected members may wish to consider, based on local

policy of councils, an increased role for local authorities in a new Scottish energy

supply system. Examples of municipal energy companies such as in Sweden,

Denmark and parts of the UK could be of relevance here.” And: “Committed to the

principles of local democracy and community action, members may also wish to

explore a more formal and strategic role for local authorities in facilitating

community/local ownership of renewable energy sources, to ensure that greater

financial benefit is retained in communities. Local authorities can potentially provide

important skills and resources, such as technical expertise, project development,

finance and political support. This topic requires further exploration, not least to

determine which types of renewable schemes would lend themselves to such an

approach.”

Community Energy Scotland’s Nicholas Gubbins observed: “We feel — certainly from

a community perspective — that if there are going to be more and more extensive

community-owned or community-engaged energy developments, we are going to

need much better economies of scale. We also think that a number of collective and

facilitative roles could be undertaken by some form of co-ordinating organisation. It

does not necessarily have to be a Government one, but if there were to be such an

organisation, it could assist in a number of quite useful ways—both in developing new

projects and in helping to underwrite or guarantee or in assisting with the various things

that are necessary to generate such economies of scale.”

Lindsay Roberts, Scottish Renewables said: “We agree that, if it is created, it must

add value and should not duplicate things that are out there already. We are coming

round to the view that it could be a very useful mechanism as a front door. There are

a huge number of projects and organisations out there to help communities, but

because there is so much support, it is sometimes very difficult for them to know who

to go to first and which door to knock on. A one-stop shop begins to open up options

for communities and to help them to travel through the project development process

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or whatever it is that they are looking towards to get them involved with renewable

energy.”

Joan McNaughton, Climate Group said: “We cannot have oversight through a piece of

policy machinery at the political level. We need something that is closer to the practical

side. If my memory serves me correctly, some of the examples that were cited in the

chapter are designed to do that. In particular, the Swedish energy agency is there to

help oversee execution and to make sure that it is delivered in an integrated way

across all the different sectors. For me, there is a question mark over that area; there

might be a gap that needs to be filled. There is a case for a bit of machinery that is

distinct from the economic regulator and from Government, but which has the

accountability to report on what is actually delivered and to spot problems before they

become a matter of post hoc accountability because they have not been solved.” And:

“I had in mind the Committee on Climate Change when I was talking about post hoc

accountability. It is not there to spot problems early on and to help people to devise

solutions. Although it is doing great work, it is not quite the kind of body that you need

for the kind of role that I would like to see, which is around implementation and

separating that from the policy development process.”

The EJFW Committee’s letter of 30 June 2017 to Mr. Wheelhouse stated interest in

better understanding: “the balance of policy between local and national (plus the

suggestion of a gap between national policy and local reality), and complexity of

energy policy and the case for a national agency to oversee it.” And stated: “Given the

scale and complexity of the many policy strands covered by the strategy, it will be

important to ensure good governance, policy expertise, cross-party buy-in (as there

has been for climate change) and long-term ownership. Sitting on the edge of a few

civil servants’ desks, we were told, will not be enough. This is a strategy the lifespan

of which extends beyond the usual electoral and budgetary cycles. The Committee on

Climate Change was mentioned, as was the Danish Energy Agency, and the model of

Transport Scotland for large infrastructure projects. Another witness underlined the

importance of a body to spot problems before they became “a matter of post hoc

accountability”. In the interests of ensuring continuity of delivery for the strategy, the

Committee recommends a long term framework be put in place; one which could

include the establishment of an independent body.” (para 70).

In responding to the committee, Mr. Wheelhouse did not address POEC explicitly, but

said “We remain resolute in the task to eradicate fuel poverty from Scotland’s

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communities and ensure that we reach the most vulnerable in society and those least

able to afford to adequately heat their home. That’s why we plan to introduce a Warm

Homes Bill to set a new statutory target for fuel poverty. We will consult on the new

powers for the Scottish Parliament for the future delivery of the Energy Company

Obligation and Warm Homes Discount, to ensure they are used most effectively to

deliver on our dual objectives on fuel poverty and climate change.”

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ECONOMY, ENERGY AND FAIR WORK COMMITTEE

PUBLICLY OWNED ENERGY COMPANY INQUIRY

SUBMISSION FROM [Citizens Advice Scotland]

Scottish Publicly Owned Energy Company (POEC)

Citizens Advice Scotland (CAS) seeks to improve outcomes for consumers. We use research and

other evidence to put consumers at the heart of policy and regulation in the energy, post and water

sectors in Scotland. We work with government, regulators and business to put consumers first,

designing policy and practice around their needs and aspirations.

Scottish consumers recently told us that they find the cost of their energy bills the second most

concerning issue they face (after Brexit). The CMA‟s Energy Market Investigation found in 2016 that

70% of domestic customers of the 6 largest energy firms were still on an expensive „default‟

Standard Variable Tariff and that consumers have been paying £1.4 billion a year more than they

would in a fully competitive market.1

The number of energy „issues‟ which the Citizens Advice Network advises on in Scotland has more

than doubled since 2012/13 and in 2017/18 we advised on over 38,000 energy issues.2 Our case

evidence clearly demonstrates that many consumers find the current energy market complex and

difficult to engage with. As the consumer advocate for the energy market in Scotland we have a

detailed understanding of the complexities and difficulties consumers experience within this market

and take a keen interest in proposals to deliver improved consumer outcomes such as through a

POEC. The energy market continues to undergo rapid transformation with new market entrants,

new business models, new technologies and new services. A POEC should therefore be adaptable

enough to meet these challenges and be mindful of supporting future, as well as current,

consumers.

What are your general views on the idea of a Scottish publicly owned energy company (POEC)?

Given that rates of fuel poverty remain stubbornly high in Scotland with 26.5% of households being

fuel poor in 2016, CAS strongly supports the objectives for a POEC stated in the final Scottish

Government Energy Strategy – to “support economic development and contribute to tackling fuel

poverty.”3 Finding the best route to deliver on these objectives is complex, as shown by the diverse

responses to the POEC proposal in the Scottish Government‟s Energy Strategy, along with evolving

thinking from the Scottish Government about the role of a POEC.4

The potential for public ownership to deliver cheaper energy for consumers by acting on a not-for-

profit model was identified by the EY report and also the First Minister.5 As the scoping note

1https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/531204/o

verview-modernising-the-energy-market.pdf 2 https://www.cas.org.uk/system/files/publications/energy_advice_summary.pdf 3 An ‘energy issue’ is defined as a piece of advice given by the Citizens Advice Network https://www.gov.scot/Resource/0052/00529523.pdf 4 https://consult.gov.scot/energy-and-climate-change-directorate/draft-energy-

strategy/consultation/published_select_respondent?_b_index=0 5 https://www.gov.scot/Resource/0053/00533962.pdf

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highlights, the retail supply of electricity and, to a lesser extent, gas is a low margin market, so to

deliver cheap energy a POEC will have to acquire a sufficiently large customer base.

An economic analysis is required to find how many customers are required to achieve desired cost

savings. CAS intends to undertake research on the affordability of energy which may include such

an analysis. Given the Scottish Government‟s interest in a local authority based approach, it should

undertake a thorough economic assessment of the impact of existing local authority supply

schemes on tariff cost.

As the scoping note recognises, customers acquired by a POEC are by definition likely to be more

engaged in the energy market, having switched at least once before to a new supplier.6 Certain

groups of consumers likely to be in fuel poverty are also less likely to switch. As our Consumer

Tracker Survey showed the overall switching rate to be 25%, while for those in social housing it was

19%, and for unemployed people, 10%. Our Power‟s void management service, switching social

housing tenants to the supplier during a void period, could be a useful model.7 The POEC will need

to consider innovative ways of attracting typically disengaged, fuel poor customers to ensure that

they can benefit from lower-cost tariffs and thus fulfil its aim.

As Ofgem‟s State of the Market Report found, consumer trust in energy suppliers is still low and

while some consumers may feel greater trust in a POEC which is not operating for profit, a POEC

would arguably be more vulnerable to a loss of trust if it faces difficulties (e.g. inability to maintain

competitive tariffs, poor customer service) than other energy companies given its high profile and

the likelihood of greater scrutiny.8 Good customer service is important to retaining customers and

we have seen first-hand through our CAS network the financial detriment that can be caused when

customer service goes wrong – such as incorrect billing and metering leading to fuel debt.9

Therefore a POEC would have to ensure the highest levels of customer service and this will need

significant resource and planning.

What role should it fulfil and how?

Delivering cheaper energy and alleviating fuel poverty are the key roles that a POEC should look to

fulfil, although given current market conditions doing so on a significant scale may be challenging.

CAS‟ consumer tracker survey showed that by far the most common reason for switching is for

lower prices, with 78% of all respondents giving this reason for switching, with the figure growing to

85% amongst those who switched to a non „big 6‟ supplier.

In terms of attempting to reach fuel poor households, a POEC could deliver tariffs targeted at these

consumers. However as referenced in the scoping report Bristol Energy trialled an at-cost social

tariff, but struggled with lower than hoped for sign up rates, which demonstrates how hard-to-reach

these customers can be.10 This mirrors one of the findings from our recent fuel poverty research

Speaking Up: Understanding Fuel Poverty Support Needs that households with the greatest need

https://www.bbc.co.uk/news/uk-scotland-scotland-politics-41560397 6 http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/Scoping_note-Publicly_Owned_Energy_Company-Centre_for_Energy_Policy.pdf 7 http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/Scoping_note-Publicly_Owned_Energy_Company-Centre_for_Energy_Policy.pdf 8 https://www.ofgem.gov.uk/system/files/docs/2017/10/state_of_the_market_report_2017_web_1.pdf

9 https://www.cas.org.uk/system/files/publications/advice_in_detail_energy_2016_17.pdf

10 http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/Scoping_note-Publicly_Owned_Energy_Company-Centre_for_Energy_Policy.pdf

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for support are often those who are not accessing it, mainly due to a lack of awareness of available

support.11

What are the key challenges that the POEC should address?

There are a huge number of challenges that a POEC could seek to address. The specific consumer

issues include providing more affordable energy, alleviating fuel poverty, supporting vulnerable

consumers, improving trust in the energy market, increasing engagement in the market, providing

consistently high levels of customer service, targeting specific groups of consumers such as those

with electric heating (who pay the most for their energy). There are also a huge range of energy

system challenges which a POEC could seek to address which would consequently benefit

consumers such as buying up community-generated electricity, diversification of energy generation

sources, increasing the number of district heating schemes, and offering flexibility services to

balance local grid demands with local supply in order to connect consumers to cheaper periods of

electricity.

However the POEC will not be able to do all of these things and the government will have to decide

where to focus its efforts to have the greatest impact. The opportunities are significant, but more

analysis to identify the best route to take to reduce fuel costs is required.

How might a Scottish energy supply company work best to support the growth of

local and community projects, and fuel poverty reduction?

The cost of fuel is one of the four drivers of fuel poverty – the others being household income, home

energy efficiency, and how energy is used in the home.12 As set out in the response to the first

question, detailed economic analysis is required to see how and if a POEC could sufficiently

decrease unit costs. If a POEC is to be a retail supply company, then its impact on the other drivers

of fuel poverty is likely to be limited. However, if the POEC took on a different form then there may

be increased scope to support local and community energy projects. Piloting new project types for

example through Power Purchase Agreements, providing expertise to communities, and supporting

community ownership were all identified as possibilities in the responses to the Energy Strategy

consultation.

In terms of the type of support required for fuel poor households, our recent research on fuel

poverty called for an adjusted minimum income standard for rural areas, increased financial support

for those in fuel poverty, awareness raising of support services, and bespoke support for those in

need, including those on electric heating, in rural areas, in rented accommodation, and for

vulnerable consumers.13

How can the POEC be best designed to align with wider Scottish energy policy objectives, and to avoid potential policy conflicts?

Care must be taken to ensure that the unintended dilution or duplication of existing policies does not

occur with the creation of a POEC. At both Scottish and UK levels there are a vast range of policies

11 https://www.cas.org.uk/system/files/publications/2018-06-

18_fuel_poverty_in_scotland_cfu_cas_briefing_sheet.pdf 12 https://www.gov.scot/Publications/2018/06/2306 13 https://www.cas.org.uk/publications/speaking-understanding-fuel-poverty-support-needs

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attempting to address problems in the energy market. Although not fully exhaustive, a count by CAS

identified 36 main policies, funds and initiatives enacted by suppliers, the Scottish Government,

Ofgem and consumer bodies. To take the example of energy efficiency, recent policies include the

new Energy Efficient Scotland (EES) scheme, the Green Deal, Home Energy Scotland Loan

Scheme, Home Energy Efficiency Programmes (HEEPS) Area Based Scheme, Warmer Homes

Scotland, and the Climate Challenge Fund. Recent research by Cambium Advocacy on behalf of

the Existing Homes Alliance concluded that „the complexity and scale of EES means some form of

national oversight arrangement will be critical for ensuring its effective and efficient delivery.‟

Certainty is also required around new powers devolved under the Scotland Act over the Warm

Homes Discount (WHD) and Energy Company Obligation (ECO). A function of a POEC could

therefore be to oversee and coordinate policy, particularly if the local authority based approach to a

POEC proposed by the Scottish Government is pursued.

Should a new Scottish POEC be more than solely a licensed energy supply company? Should it have a direct role in energy generation?

The Minister for Energy, Connectivity and the Islands‟ letter to the committee indicated the Scottish

Government‟s intention for a Local Authority based approach and that this would initially focus on

the retail supply of electricity and gas with the potential for future involvement in renewable

generation. Suggestions on the nature of a POEC have varied significantly beyond the retail supply

of energy, with responses to the Energy Strategy consultation including, but not limited to,

suggestions of a community model, a third party licensed supplier (TPLS), a district heating

facilitator, an advice provider, a distribution company, an energy agency, a supporter of local

planning processes, a driver of innovation, an investor in infrastructure, and an aide for off-gas

areas.14 There is thus a range of other functions a POEC could have beyond the retail supply of

energy, and there is a need to analyse which option, or options, would provide the best value and

consumer outcomes.

Dr David Toke has proposed a role for long term power purchase agreements to new renewable

energy schemes by a POEC to improve its competitive advantage over other suppliers and deliver

cheaper energy.15 CAS would welcome further consideration of the benefits and practicalities of this

proposal, particularly if a POEC is ultimately to be involved in the generation as well as the retail

supply of electricity.

How might the POEC be designed to promote objectives and functions beyond the retail of gas and electricity (e.g. supporting investment and innovation in new technologies and infrastructure)? What benefits are there to having wider objectives?

If there is a sole focus on the retail supply of energy, a POEC is unlikely to be able to take a whole

system or coordinating role to support investment and innovation. It is also likely to face the same

challenges that current suppliers contend with and will need to adapt to the many changes predicted

in the energy market in coming years. Citizens Advice‟s „Disrupted Decade‟ research suggested that

of these, those which would have the greatest impact on consumers are: new pricing models – most

significantly time of use (ToU) tariffs, that vary energy costs by time of day; energy retail

14 https://consult.gov.scot/energy-and-climate-change-directorate/draft-energy-

strategy/consultation/published_select_respondent?_b_index=0 15 http://www.nuclearpolicy.info/wp/wp-content/uploads/2018/07/A290_NB177_The_potential_of_a_SEC.pdf

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intermediaries - making it easier for consumers to find and switch tariffs by handling part or all of the

switching process; widespread adoption of storage - reducing demand and possibly cost on the

electricity network at peak times; distributed generation and costs with for example rooftop solar

panels resulting in a re-allocation of network costs.16 A POEC should therefore be designed to adapt

to a rapidly evolving energy market, meeting the needs of future energy consumers. This could

include managing „flexibility services‟ to match lowest cost energy generation with local supply,

whilst also offering robust consumer protection in an area that is currently lacking mandatory

consumer protection.

What governance arrangements should a Scottish POEC have? Who should it be accountable to e.g. Parliament?

A POEC, should it take the form of a retail supply company, will have to comply with the same

regulatory arrangements under Ofgem as any other energy company. However, the company‟s

public ownership would imply the need for greater public accountability than a private energy

company. Scottish Water provides an example of a publicly owned company responsible to the

Scottish Government with its Chair and Non-Executive members appointed by Scottish Ministers

and such an approach could also be taken for a POEC. Similarly, under section 251 of the

Companies Act 2006, Scottish Ministers act as Shadow Directors of Caledonian MacBrayne.17 A

POEC should lay an annual report before the Scottish Parliament and MSPs should be able to table

Parliamentary Questions about its performance and operation. Finally, as the scoping note

indicated, a publicly owned energy company would inevitably be subject to greater scrutiny than

private supply companies, by both media and the public‟s use of Freedom of Information requests.18

• Should legislation be required to underpin the creation of a POEC? CAS does not take a firm view on the need for legislation. While writing a POEC into statute may increase its permanence, the functions of a POEC must be kept under review to allow it to adapt to the needs of consumers in a rapidly changing energy market.

16 https://www.citizensadvice.org.uk/Global/CitizensAdvice/Energy/DisruptedDecade.pdf 17 https://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf 18 http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/Scoping_note-Publicly_Owned_Energy_Company-Centre_for_Energy_Policy.pdf

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ECONOMY, ENERGY AND FAIR WORK COMMITTEE

PUBLICLY OWNED ENERGY COMPANY INQUIRY

SUBMISSION FROM Catherine Waddams, Centre for Competition Policy, University of East Anglia

Scottish Publicly Owned Energy Company (POEC)

What are your general views on the idea of a Scottish publicly owned energy company (POEC)? A Scottish POEC could achieve a number of interesting objectives, but there may be better instruments for achieving each of these different objectives in the energy sector. In particular, as other questions indicate, there is a danger that conflicting and/or poorly defined objectives result in poor achievement of any of them. A Scottish POEC clearly could pursue a number of different objectives, but this makes it doubly important, as the Institute of Public Policy Institute (IPPI) Scoping Note emphasises, that the objectives are clearly defined, both in terms of principles and expected outcomes.

What role should it fulfil and how? The role to be fulfilled by a Scottish POEC should be determined by elected representatives. The Scoping Note makes clear the possibilities. There is no reason why a POEC would have significantly lower costs than a privately owned company, and the low profit margins, particularly in electricity, indicate that there is little scope for much lower prices without breaching state aid rules. One obvious role for a POEC might be a policy of charging similar prices to ‘new’ and ‘loyal’ consumers, i.e. removing the price discrimination which is currently observed in the sector, though initially all its consumers would be new. However if other companies are offering lower prices to attract new customers, this will affect the ability of the POEC to attract consumers without similarly low prices. Given the small, or even negative, margins on these consumers, it may be necessary to raise prices to those who show some loyalty to achieve break even in the longer term. The ability to do so will be somewhat constrained by Ofgem’s price cap on default tariffs. More exploration of alternative business models within the sector, for example with the companies mentioned in the scoping project, but also with longer established companies which have attempted such undifferentiated pricing policies, like Ebico, could help to explore the possibilities. The tension for any new start up in this market is that while research shows that price savings are the strongest driver in consumers’ intentions1 to switch and in their

1 Empirical Evidence of Consumer Response in Regulated Markets (C. Waddams Price and M. Zhu), Journal of Competition Law and Economics, 12, 1, pp 113-149, 2016.

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actions2, there is still a high degree of inertia: savings are necessary but not sufficient to persuade most consumers to switch. While some consumers may have a preference for a Publicly Owned company, there would probably be insufficient active switchers to generate a large consumer base for the POEC. Moreover experience and evidence suggests that private commercial firs are more effective at communicating with their consumers than their public counterparts (for example in knowledge of privately run price comparison websites rather than official public equivalents). While the private sector may be trusted less, it has a better track record of communicating with consumers.

What are the key challenges that the POEC should address? The key high level challenge will be for the POEC to have clear objectives and success measures. Attracting consumers will also be a challenge if the POEC is to meet multiple objectives while still breaking even, see comment above.

How might a Scottish energy supply company work best to support the growth of local and community projects, and fuel poverty reduction? My main comment is on reducing fuel poverty. Our own research confirms historically higher levels of fuel poverty in Scotland than the average in the rest of the UK. Since there is likely to be little profit to redistribute, one way in which the POEC could reduce fuel poverty is to give special assistance to consumers at risk of fuel poverty to switch to cheaper deals, but this will be limited in the market by restrictions imposed by State Aid rules. The POEC, like other companies, can help consumers with reducing the quantity of energy they use through energy conservation measures, and, like Robin Hood Energy, could voluntary participate in the Warm Home discount and other schemes. But this will have financial costs for the company. There is some evidence that those at risk of fuel poverty are more likely to be on more expensive tariffs, so a significant reduction in fuel poverty might be available if such consumers moved to tariffs with lower prices. But there will be limits on how far the POEC itself can stimulate such change, and there might be other more effective instruments which the Scottish government could use to achieve lower prices for groups at risk. One of these is collective auctions, where a group of consumers are offered a better deal. Experience of these is mixed3, and under current legislation consumers are required to opt in, which poses many of the same challenges of inertia for certain consumers as direct switching. The Scottish government might

2 (D.Deller, M. Giulietti, G. Loomes, C. Waddams Price, A. Moniche and J.Y.Jeon), CCP working paper 17-5,

http://competitionpolicy.ac.uk/documents/8158338/17199160/CCP+WP+17-5+complete.pdf/fdaaed88-56e5-44f9-98db-6cf161bfb0d4; Consumer behaviours in the British retail electricity market (M.Flores and C. Waddams Price), The Energy Journal, 39, 4, 153-179, 2018 3 Helping customers switch: collective switching and beyond, published by DECC 2013

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/253862/Helping_Customers_Switch_Collective_Switching_and_Beyond_final__2_.pdf

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want to explore the potential of opt out collective switching as an instrument to offer lower prices to consumers who are not currently active in the market4. One problem for designing and monitoring such initiatives is that those inactive consumers who may be most at need are often hard to reach because of their circumstances. This often makes it difficult to identify their needs and appropriate remedies, and raises the cost of policy development and research which has the potential to benefit this group.

How can the POEC be best designed to align with wider Scottish energy policy objectives, and to avoid potential policy conflicts?

As suggested above, it may be clearer if different objectives are delivered by

different bodies and instruments, rather than expecting the POEC to meet several

objectives which may be in conflict.

How might the POEC be designed to promote objectives and functions beyond the retail of gas and electricity (e.g. supporting investment and innovation in new technologies and infrastructure)? What benefits are there to having wider objectives? There are dangers as well as benefits in expecting the POEC to meet wider objectives. One is that it may carry so many potentially conflicting expectations that it will inevitably disappoint at least some of its supporters, who then lobby for changes which are incompatible with its other objectives. Given the importance of the issues, particularly to low income households and those in vulnerable situations, it is important not to ‘set it up for failure’.

What governance arrangements should a Scottish POEC have? Who should it be accountable to e.g. Parliament? The POEC should be accountable to Parliament (rather than government) if it is meeting Parliamentary objectives.

Should legislation be required to underpin the creation of a POEC? A statutory basis might be the best wat of making its objectives and priorities clear, though this is not always easy for politicians to clarify.

4 for information on experience of an opt-in auction see and possibilities of opt-out auctions see Switching

Energy Suppliers: It’s Not All About the Money; and Collective Switching and Possible Uses of a Disengaged Consumer Database (D. Deller, P. Bernal, M. Hviid and C. Waddams Price), Report for Ofgem, 2017

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NOTIFICATION TO THE SCOTTISH PARLIAMENT The Insolvency (Amendment etc.) (EU Exit) Regulations 2018 (“the Regulations”) Brief explanation of law that the proposals amend The Regulations would amend EU Regulation 2015/848 (“the EU Regulation”) as it applies in domestic law after Exit Day. The EU Regulation deals with cross-border cooperation and coordination of insolvency proceedings for businesses and individuals with operations/assets in more than one member state, and provides a framework for determining where applications for insolvency proceedings can be made; the applicable law; and the interaction between insolvency proceedings in different member states. The Regulations would also correct various deficiencies across UK insolvency legislation where such legislation reflects the provisions of the EU Regulation which are repealed or amended by the Regulations. Summary of the proposals and how these correct deficiencies Once the UK is no longer a member state of the EU, insolvency proceedings commenced in the UK will no longer have automatic recognition in EU member states under the EU Regulation, and it will not be possible for the UK to continue the current cross-border system on its own. The EU Regulation, as it is retained in UK law after Exit Day, will therefore not operate effectively and requires to be amended to reflect the fact that the UK will no longer be a member state of the EU. The proposal is for the major part of the EU Regulation to be removed from UK law. The UK would maintain a modified version of the EU Regulation’s rules for opening insolvency proceedings, that would sit alongside the UK’s own domestic rules. The proposed amendments would allow UK courts to continue to open insolvency proceedings where an EU individual or company has an establishment in the UK. The other provisions in the EU Regulation would be repealed. The provisions of the EU Regulation are reflected in various other pieces of insolvency legislation and which will result in deficiencies . The Regulations would also amend these deficiencies. AiB and The Insolvency Service (UK Government) have carried out an extensive review of the various pieces of insolvency legislation to identify the deficiencies and the actions required to cure or mitigate the deficiencies.

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An explanation of why the change is considered necessary On exiting the European Union without a deal being agreed the cross-border insolvency procedures would no longer be available. Therefore there would be no formal cooperation mechanisms between UK insolvency practitioners and their counterparts in other EU countries. This could impact on securing and the recovery of overseas assets for the benefit of the creditors. AiB considers that this would not be desirable, particularly for existing and ongoing insolvency cases. AiB and the Insolvency Service share a common view that there are significant benefits in retaining cross-border insolvency recognition and cooperation where possible. Scottish Government categorisation of significance of proposals AiB consider that the proposals should be classified as Category A – the lowest level of scrutiny as they are minor and technical in nature. This rationale for this assessment is based upon the well-precedented approach to dealing with the area of mixed competence as highlighted below. The deficiencies created are clear in this instance. The key consideration is the most effective manner to deal with the contingency arrangements for a No deal Brexit and experience has shown that the proposed approach has minimised the complexity involved. Impact on devolved areas The EU Regulation spans a mix of reserved and devolved matters. While personal insolvency is fully devolved (with 3 narrow exceptions), the arrangements for corporate insolvency are very complex (in devolution terms) - with certain areas devolved, some fully reserved and other measures spanning devolved and reserved competence. In particular, winding up in Scotland spans mixed competency with (broadly) general legal effect being reserved and the process being devolved. Summary of stakeholder engagement/consultation The main stakeholders are Insolvency Practitioners and in particular their Recognised Professional Bodies. ICAS and R3, the trade association for the insolvency, restructuring, advisory and turnaround professionals have previously indicated support for amending legislation covering corporate insolvency matters to be covered, insofar as possible, in a single instrument laid in the UK Parliament. There has been no formal consultation on the EU Exit proposals and the deficiencies created. However, a working group on corporate insolvency has met frequently over the past two years on the project to modernise the corporate insolvency rules in Scotland and these discussions have touched on the EU Regulation and the most effective approach to deal with these complex areas of cross-competence. Summary of reasons for Scottish Ministers’ proposing to consent to UK Ministers legislation When the EU rules on cross-border corporate insolvency were first implemented in 2003 it was done entirely on a cross-UK basis, including personal insolvency, in

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recognition of the difficulties in proceeding otherwise. Similar provision for cross-border insolvency cases was made on that basis in 2006 under the Insolvency Act 2000 with a Legislative Consent Motion in the Scottish Parliament and also in the implementation of legislative changes in June 2017 related to the commencement of aspects of the EU Regulation (utilising section 57(1) of the Scotland Act 1998). Ministers consider that this approach makes sense for the mixed area of corporate insolvency. There is currently a separate and significant ongoing exercise being carried out to modernise the rules covering corporate insolvency for Scotland. This is being carried out by the AiB in conjunction with the UK Insolvency Service. Due to cross-competency in the area of winding-up, a Scotland Act Order (2018/174) was sought and passed through both the Scottish and UK Parliaments. This secured the mutual transfer of competence for the purposes of drafting the modernised insolvency rules and enabled the cross-competency area of winding up to be included in an SSI, to be laid in the Scottish Parliament. Future amendments would be possible through instruments laid in either the Scottish Parliament or UK Parliament, subject to the agreement of each administration. There has been good co-operation with the UK Insolvency Service on this work and the approach taken has been welcomed by the main stakeholders. A Scottish SSI would cover the amendments required for fully devolved aspects in receivership and personal insolvency. AiB consider that including devolved aspects of corporate insolvency in Scottish Regulations would add greatly to the complexity of the provisions. AiB therefore consider the most effective route in respect of elements that span both devolved and reserved competence is to deal with them in the UK-wide regulations taken forward in parallel by UK Ministers (which will extend to Scotland anyway for wholly reserved aspects such as company administration). Such an approach would mean that the UK SI would cover the necessary aspects of corporate insolvency in relation to the processes of administration, company voluntary arrangement and winding up. AiB considers that this is an area in which it would be beneficial to take a consistent approach with the rest of the UK to remove doubts in areas which span reserved and devolved competence Intended laying date of SI 24 October 2018 If the Scottish Parliament will not have 28 days to scrutinise Scottish Minister’s proposal to consent, why not? Please note that the date on which the UK Government proposes to lay these regulations is 24 October 2018. I realise that with the October recess starting on 6 October I am asking for approval within a shorter timescale than the 28 days outlined in our protocol.

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Information about any time dependency associated with the proposal Time dependency is set out above. The timeline for the SI is being driven by the UK Government who have an agreed laying date. Any significant financial implications? AiB does not consider that there will be any significant financial implications for the Scottish Government. However, AiB considers that if the deficiencies are not addressed in this manner then cross border insolvency process will be more complex. This will result in more expensive and lengthier insolvency processes, increased court actions in multiple jurisdictions and ultimately far lower returns to the creditors involved.

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